Regulators could hurt the economy by setting too-high capital standards for Wall Street, and could push borrowers toward non-bank lenders, said Neel Kashkari, Federal Reserve Bank of Minneapolis president, according to an article by Patrick Rucker for Reuters.
The banking system needs reform in order to prevent a repeat of the 2008 financial crisis, Kashkari said, according to the article. Wall Street firms should hold more capital to brace against economic shocks, he continued.
From the article:
But regulators must be mindful that forcing banks to hold capital means those institutions may have less money to lend, Kashkari told the Peterson Institute for International Economics.
"More capital has downsides that need further exploration," he said. "In particular, higher capital could raise the cost of lending and potentially reduce economic activity."
Kashkari warned that requiring too much from banks could give an advantage to non-banks, according to the article.
Not everyone agrees, however, Fed governors Daniel Tarullo and Jerome Powell said that the central bank would more than likely require eight of the largest U.S. banks to maintain more equity to pass annual "stress test," exams.
Also, in the Republicans’ new plan to replace Dodd-Frank, banks would be required to surpass certain thresholds, such as having a 10% leverage ratio, or the measure of the bank’s capital versus its total assets, therefore decreasing the amount of borrowing or leverage banks can do.